Question about SEP-IRA contribution

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rtlexx
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Question about SEP-IRA contribution

Post by rtlexx » Tue Apr 10, 2012 12:54 pm

I am currently trying to wrap up my 2011 taxes. I am opening up a SEP-IRA account and I'm about to make a contribution so I can make a tax deduction. I know that the contribution is based off of 25% of your NET business income.

So here is the question: Would I realize a higher overall tax deduction if I were to -
A) NOT subtract ALL of my business expenses so I can take a contribution from a higher Net business Income?
or
B) Subtract ALL of my business expenses so I can take a contribution from a lower Net business income?

My total income from Self Employment work of 2011: $47,334
My TOTAL business expenses for Self Employment work of 2011: $24,742
My Net income from Self Employment work of 2011 : $22,592
My Income from Employment work for 2011: $67,666

Without any business expense deductions, I owe roughly: $9000 in taxes
With business expense deductions (not including the SEP-IRA contributen yet), I owe roughly: $1800 in taxes

Thanks for any advice from you guys.
-Rich

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PaddyMac
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Re: Question about SEP-IRA contribution

Post by PaddyMac » Tue Apr 10, 2012 4:56 pm

rtlexx wrote:I am currently trying to wrap up my 2011 taxes. I am opening up a SEP-IRA account and I'm about to make a contribution so I can make a tax deduction. I know that the contribution is based off of 25% of your NET business income.
Big question: Are you a corporation or a sole proprietor? if the latter, it's more like <20% after you take into account the deduction for half the SE tax.
Do the IRS worksheet for sole proprietors in Pub560 here:
http://www.irs.gov/publications/p560/ch05.html

check your answers against SEP-IRA calculators
http://www.wellsfargoadvantagefunds.com ... rs/sep.jsp
rtlexx wrote:So here is the question: Would I realize a higher overall tax deduction if I were to -
A) NOT subtract ALL of my business expenses so I can take a contribution from a higher Net business Income?
or
B) Subtract ALL of my business expenses so I can take a contribution from a lower Net business income?
You DO want to take all the business expenses you can, as these expenses reduce your Self Employment tax, which is taxed at 15.3% normally (less in 2011 and 2012 with the payroll tax holiday). This tax pays for your medicare/SS. I can't see how it helps to have more income if you pay more in SE tax!

You need to completely fill out the 2011 Schedule C and work out half of your SE tax. Then use that in the SEP-IRA worksheet.

Muchtolearn
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Re: Question about SEP-IRA contribution

Post by Muchtolearn » Tue Apr 10, 2012 5:30 pm

You most certainly should take the business deductions. You will be way ahead. Having said that, unless yours is a capital intensive business, your expenses are about 1/2 of the gross. This is literally an automatic audit especially if you have a home office deduction and use of a car for business purposes. Why so high? Could they be pared down a bit?

JoeJohnson
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Re: Question about SEP-IRA contribution

Post by JoeJohnson » Tue Apr 10, 2012 6:44 pm

As mentioned, take any legitimate deductions...also, if you're using TurboTax, it has a great feature to calculate the max SEP contribution for you.

rtlexx
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Re: Question about SEP-IRA contribution

Post by rtlexx » Tue Apr 10, 2012 8:42 pm

Muchtolearn wrote:You most certainly should take the business deductions. You will be way ahead.
Having said that, unless yours is a capital intensive business, your expenses are about 1/2 of the gross. This is literally an automatic audit especially if you have a home office deduction and use of a car for business purposes. Why so high? Could they be pared down a bit?
I am a recently board certified medical doctor and I did a lot of physician contract work on the road. Being a physician gets expensive with state licensure, board certification, CME (continuing medical education) conferences, medical textbook purchases. I also declared a home office since I don't have an away office to do business paper work and medical board preparation. Plus turbo tax has me down as being a low risk of an audit. 8-)

mschmitt
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Re: Question about SEP-IRA contribution

Post by mschmitt » Tue Apr 10, 2012 8:52 pm

Why a SEP-IRA instead of a solo 401k?

I'm an independent contractor and was faced with the choice between the two several years ago. I heard all the noise about the 401k being much more difficult to setup, maintain, etc. But, if you look at the paperwork on Vanguards site it's identical between the two. The solo 401k also always a much larger contribution, especially for lower income levels ($16,500+25%). According to Vanguards calculator you could contribute $18,747.96 to the 401k but only $4,199.19 to the SEP. Maybe I'm missing something, are you the sole proprietor?

Here's the calculator: https://personal.vanguard.com/us/SbsCal ... &NavStep=1

EDIT: plus with the 401k you have the ROTH option as well.

pshonore
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Re: Question about SEP-IRA contribution

Post by pshonore » Tue Apr 10, 2012 9:29 pm

Muchtolearn wrote:You most certainly should take the business deductions. You will be way ahead. Having said that, unless yours is a capital intensive business, your expenses are about 1/2 of the gross. This is literally an automatic audit especially if you have a home office deduction and use of a car for business purposes. Why so high? Could they be pared down a bit?
And you're basing that on......? The reality is the IRS is just as concerned about people who don't take all their expenses as they are the ones who pad them

DTSC
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Re: Question about SEP-IRA contribution

Post by DTSC » Tue Apr 10, 2012 9:59 pm

If I remember correctly, the solo 401K must be set up before 12/31 of the tax year in question, whereas the SEP-IRA deadline is when tax is due, around 4/15 of the next year.

JoeJohnson
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Re: Question about SEP-IRA contribution

Post by JoeJohnson » Tue Apr 10, 2012 10:50 pm

DTSC wrote:If I remember correctly, the solo 401K must be set up before 12/31 of the tax year in question, whereas the SEP-IRA deadline is when tax is due, around 4/15 of the next year.
correct

rtlexx
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Re: Question about SEP-IRA contribution

Post by rtlexx » Tue Apr 10, 2012 11:18 pm

mschmitt wrote:Why a SEP-IRA instead of a solo 401k?

I'm an independent contractor and was faced with the choice between the two several years ago. I heard all the noise about the 401k being much more difficult to setup, maintain, etc. But, if you look at the paperwork on Vanguards site it's identical between the two. The solo 401k also always a much larger contribution, especially for lower income levels ($16,500+25%). According to Vanguards calculator you could contribute $18,747.96 to the 401k but only $4,199.19 to the SEP. Maybe I'm missing something, are you the sole proprietor?

Here's the calculator: https://personal.vanguard.com/us/SbsCal ... &NavStep=1

EDIT: plus with the 401k you have the ROTH option as well.

Yes, I'm a sole proprietor/independent contractor. Would the contributions be different if I was incorporated? My SEP-IRA is through Vanguard. I will soon open a Roth 401k for tax season 2012. Unfortunately, the deadline to set up the 401k for the 2011 tax season was Dec. 31, 2011.

juventussoccr
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Re: Question about SEP-IRA contribution

Post by juventussoccr » Wed Apr 11, 2012 12:50 am

Contributions to a SEP IRA can be made as late as the extended due date of your return so October 15th if you have a schedule C.

jared
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Re: Question about SEP-IRA contribution

Post by jared » Wed Apr 11, 2012 7:34 am

pshonore wrote:
Muchtolearn wrote:You most certainly should take the business deductions. You will be way ahead. Having said that, unless yours is a capital intensive business, your expenses are about 1/2 of the gross. This is literally an automatic audit especially if you have a home office deduction and use of a car for business purposes. Why so high? Could they be pared down a bit?
And you're basing that on......? The reality is the IRS is just as concerned about people who don't take all their expenses as they are the ones who pad them
Exactly. I would like to see something to support this "automatic audit" statement.

mschmitt
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Joined: Mon Aug 13, 2007 7:16 pm

Re: Question about SEP-IRA contribution

Post by mschmitt » Wed Apr 11, 2012 9:36 am

rtlexx wrote:
mschmitt wrote:Why a SEP-IRA instead of a solo 401k?

I'm an independent contractor and was faced with the choice between the two several years ago. I heard all the noise about the 401k being much more difficult to setup, maintain, etc. But, if you look at the paperwork on Vanguards site it's identical between the two. The solo 401k also always a much larger contribution, especially for lower income levels ($16,500+25%). According to Vanguards calculator you could contribute $18,747.96 to the 401k but only $4,199.19 to the SEP. Maybe I'm missing something, are you the sole proprietor?

Here's the calculator: https://personal.vanguard.com/us/SbsCal ... &NavStep=1

EDIT: plus with the 401k you have the ROTH option as well.

Yes, I'm a sole proprietor/independent contractor. Would the contributions be different if I was incorporated? My SEP-IRA is through Vanguard. I will soon open a Roth 401k for tax season 2012. Unfortunately, the deadline to set up the 401k for the 2011 tax season was Dec. 31, 2011.
Ahh, I forgot about the need to establish the 401k before the end of the year. But I would definitely do it for 2012.

I believe if your incorporated (or have employees??) you can't do a SOLO-401k. But, if you are an independent contractor I think the 401k option is the way to go.

Tony
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Location: California

Re: Question about SEP-IRA contribution

Post by Tony » Wed Apr 11, 2012 10:41 am

Check carefully to make sure that you have the correct amount for your SEP contribution. Both your SEP contribution and your Self-Employment deduction are affected by changes in the law that happened very late in 2011 (or earlier in 2012, I'm not sure which) Be sure you have updated instructions. TurboTax Deluxe handles this automatically.
Tony

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PaddyMac
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Re: Question about SEP-IRA contribution

Post by PaddyMac » Wed Apr 11, 2012 10:54 am

rtlexx wrote:Yes, I'm a sole proprietor/independent contractor. Would the contributions be different if I was incorporated?
Kinda. I understand that if you incorporate you are actually an employee, in which case the SEP-IRA contribution is a straight 25% without the fiddly calculation for half the net SE tax.

But I agree that setting up a Vanguard Individual 401k is the way to go for next 2012. That paperwork is not that hard.

rtlexx
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Re: Question about SEP-IRA contribution

Post by rtlexx » Thu Apr 12, 2012 10:57 am

Thanks to everyone for their posted advice. 8-)

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